UCF Officially Takes Over Sanford Burnham Building, Will Transform It Into Cancer Research Facility

Sanford Burnham’s greatest legacy in Orlando may be the beautifully designed building that’s perched in Lake Nona’s medical city, a stone’s throw from the UCF College of Medicine.

UCF officially took over the 175,000-square-foot facility on December 2 to turn it into a cancer research and treatment facility, closing the book on the research institute’s Florida campus.

In the vast empty spaces of the airy, sunlit building, all Dean Deborah German sees is opportunity — even in a seemingly boring conference room.

“Imagine this as a cancer center. Imagine that we have a cancer symposium coming from all over the community or all over the world,” German said in a recent tour. Let’s imagine that we have a support group for people with a particular type of cancer and we want to hold meetings. Maybe we want them to come for breakfast and we want them to get to know each other. For education, if we have post-doctoral fellows, graduate students, medical students, residents, imagine them all in here talking about the latest in basic research and how that moves all the way to the bedside,” German said.

There will soon be a hospital next door — UCF’s teaching hospital that just broke ground — and this building’s auditorium will make a perfect space for grand rounds.

“I’m grateful to SBP people who built this building because they had a lot of resources and they could build a space like this. … Part of our job is that this is vibrant and this is used all the time,” German said.

She walked through the first-floor cafe area that’s surrounded by windows and greenery. Yet another opportunity for holding conferences. Or maybe students can come over from across the street and study there.

“I can imagine benches out there,” she said pointing at the spaces between the trees. And then, as she walked past the small dining tables, she asked the facilities’ director who was walking along with her to remove the bright artificial flowers that sat in small vases.

“I like flowers. I think these are just … Throw them away in place of your choosing,” she said.

On that November day, only a few people working with Sanford Burnham were left in the building. The one faculty member who was still there had pasted a piece of paper on his office nameplate with his new title at the institution he was moving to.

Most of the equipment was gone.

Some had already followed the researchers who left to destinations like Florida Hospital, Johns Hopkins All Children’s Hospital and the University of Florida. Equipment that was purchased with local money has remained in the facility, including furniture and some lab equipment.

“Some hi-tech equipment was transferred to UCF and additional general research equipment will remain in the building to be used by UCF,” wrote the institute’s spokeswoman Deborah Robison in an email.

One of the building’s crown jewels, the sophisticated drug discovery robotic platform that made up the Conrad Prebys Center for Chemical Genomics, was transferred — not sold, Sanford Burnham officials said — to Discovery Cure Institute, a newly formed nonprofit research institute in Alachua. The company “is focused on finding new treatments for cancer and infectious diseases using its ultra-high-throughput screening and medicinal chemistry capabilities,” according to the forms filed with the state.

Discovery Cure also recruited members of the Sanford Burnham’s drug discovery team, said Robison in the email.

Sanford Burnham Prebys Medical Discovery Institute came to Florida a decade ago with more than $150 million in state incentives and matching funds from Orlando, Orange County and Tavistock. In return, it agreed to create more than 300 jobs in 10 years.

Then, about three years ago, the nonprofit research institute, headquartered in La Jolla, Calif., began planning its departure from Orlando.

It decided to leave because it found the operations to be financially unsustainable, its officials said. The incentive money was running out and the federal funding wasn’t keeping up with the institute’s projections a decade ago, they said.

By then the institute had reached about 87 percent of jobs it had promised and it couldn’t break its contract and leave.

So it first tried to hand off operations to the University of Florida. But that deal fell through. Then it tried to strike a deal with Florida Hospital; that deal also fell through earlier this year.

Eventually, UCF’s proposal won the approval of the stakeholders.

Before the agreements were final, Sanford Burnham owned the building. Orange County currently owns the land.

The institute gave the building to the county for free. In turn, the county will sell the land and building for $50 million to UCF.

UCF, through one of its Direct Support Organizations, will pay the mortgage, without interest, to the county quarterly once it starts receiving rent payments from the building’s tenants, for 30 years.

Orange County will then distribute the money among the funding parties, 43 percent of which will go to the county, 35 percent to the City of Orlando and the rest to Tavistock.

German is planning to fill the building with clinicians and scientists in the next two years. Its name is now official: UCF Lake Nona Cancer Center.

“When I came to UCF, everyone said UCF: it stands for U Can’t Finish and Under Construction Forever. And I didn’t really like either one of those, so I decided that for me personally, UCF is going to stand for U Can’t Fail,” she said.

The university wants to turn the facility into a cancer research and treatment facility with several private partners, including HCA’s Sarah Cannon cancer institute and Provision Healthcare, which specializes in proton therapy.

“And there are other partners but they still don’t want to be named yet,” said German, as she walked the hallways of the building.

Dr. Annette Khaled, a professor and the head of the cancer division at UCF Burnett School of Biomedical Sciences, may be among the first occupants of the building,

“It’s a beautiful design of lab space. It really allows us not just to be in our individual world, but the opposite,” said Khaled, standing on the third floor of the building, where faculty offices sit across from their glass-shielded labs. “Students will be here. Labs will be here. And on the floors below, you’ll have patients and doctors and you have space to meet them. It’s super significant.”

But before all that, German is planning to bring the building back life. She’s hosting a Christmas party there.

“Wouldn’t you? Since the building is completely empty, I don’t want the building to feel lonely like it’s abandoned. [The building] comes with holiday decorations, so let’s start right away,” she said.

Source: Orlando Sentinel

How Healthcare Providers Are Shifting to Meet New Patient Demands

“As patient preferences shift toward cost or value, providers are adjusting their services to meet this demand.” That is according to Trisha Talbot, a managing director in the Phoenix office of Newmark Knight Frank.

Talbot, a speaker at the RealShare Healthcare conference in Arizona on December 5th and 6th, says that she is seeing everything from practices that serve the high volume, low income patient-base to those with employer-based insurance to the other end of the spectrum where they offer concierge medicine.

When asked about trends in the sector, she said that the trend for a practice to be located near a serving hospital is consistent.

“Providers seeking retail locations is a trend I see continuing in the New Year. Adaptive reuse of retail space that has gone dark, developing retail pad sites and/or absorbing in-line retail spaces have all become popular. Retail offers providers to offer its patients visibility, parking and convenience next to other amenities.”

She explains that acute care hospitals and outpatient care will always be required.

“There are patients that require a lot of healthcare services and patients that do not. If a patient uses a lot of healthcare services, most likely cost-effective and convenient access to services will be important. If a patient only needs an annual check-up and urgent care services for the occasion flu, their concerns are different. Healthcare practices to serve both needs and those in between are required. The challenge is how practices are deciding what to offer and what demographic they want to serve.”

Source: GlobeSt.

Three Healthcare Related Transactions Rank Among South Florida’s Largest Office Sales In October

South Miami Medical Arts Building – Estate Investments Group | $5.8M

Estate Investments Group purchased the South Miami Medical Arts building in South Miami for $5.8 million.

The 21,455-square-foot property at 6201 Southwest 70th Street traded hands for about $270 per square foot. The seller, 6201 of Miami LLC, is tied to the construction engineering company Munilla Construction Management.

The four-story building was completed in 1972, records show.

5297 West Copans Road – Centers Health Care | $5.5M

Centers Health Care bought a nearly 33,000-square-foot, single-story office building with lake views in Margate for $5.5 million.

The seller, Northwest Broward Development LLC, is led by attorney Leigh Katzman. The property at 5297 Copans Road previously sold for $3.2 million in 2010.

Sunrise Medical Park – Marc Gordon | $5M

Sunrise Medical Park, a medical office complex consisting of five, one-story buildings, sold for $5 million to Flamingo Medical Office LLC, led by Marc Gordon.

The seller is a company tied to Levy Realty Advisors. The property at 8391-8399 West Oakland Park Boulevard last sold for $3.2 million in 2011. Tenants include Holy Cross and Tenet Hospital Groups.

 

Source:  The Real Deal

Boca Raton-based Promise Healthcare Group Files For Chapter 11 Bankruptcy

Boca Raton-based Promise Healthcare Group LLC, a hospital and nursing home chain, has filed for Chapter 11 bankruptcy reorganization.

In a petition filed with a Delaware bankruptcy court on Nov. 5, the company said it had debt exceeding $565 million, plus accrued and unpaid interest of $110 million, accrued expenses and accounts payable of about $94 million, and capitalized leases of about $13 million.

According to the petition, the company has hired FTI Consulting Inc. to assist in “evaluating strategic and financial alternatives to improve liquidity” and appointed FTI’s senior managing director for corporate finance and restructuring, Andrew Hinkelman, as chief restructuring officer and interim chief financial officer.

Under Chapter 11 bankruptcy, a company’s debtor remains in control of the reorganizing business as it seeks restructuring and new financing.

A statement by Hinkelman to the court said Promise Healthcare, with 4,466 employees, operates 16 acute care hospitals and two skilled nursing facilities across nine states. In Florida, Promise Healthcare operates hospitals in Miami, Fort Myers and The Villages.

“While I believe that the Debtors’ overall business is fundamentally strong, the Debtors have been operating with an unsustainable balance sheet due to current industry dynamics and certain underperforming facilities within the Debtors’ portfolio,” the statement said.

The filing seeks approval of $85 million in post-bankruptcy financing from Wells Fargo Bank, which would keep the company and its properties in operation during the restructuring process.

During the bankruptcy, the company intends to sell off two of its hospitals, in Los Angeles and St. Louis, Mo., as well as real estate in San Diego, while it negotiates sale or restructuring of its remaining assets, Hinkelman’s statement says. He added that the company intends to exit the bankruptcy in six months.

According to a 2017 Sun Sentinel story, the company was founded in 2003 by Peter Baronoff, a former Boca Raton City Council member, with the goal of offering superior care for seriously ill patients. Baronoff won the Sun Sentinel Co.’s 2016 Excalibur Award for Business Leader of the Year in Palm Beach County. He resigned as the company’s CEO early this year and resigned from the board of directors in May, Hinkelman’s statement said.

Richard Gold, the company’s president and chief operating officer, resigned in July.

While net revenue increased from $489.5 million in 2015 to $512.2 million in 2016, it declined to $462.5 million in 2017 as the company reported an operating loss of $25.2 million.

Factors contributing to the bankruptcy included sharp decreases in Medicare reimbursement rates for patient stays in 2015 and 2016, the filing states, as well as “significant” investments in new business projects that have since been abandoned.

Source: SunSentinel

Are Non-Profit Hospital Mergers Making Things Better Or Worse?

You’ll hear phrases like “economies of scale” and “acquired efficiencies” and the obliquely vague “synergistic benefits.” It might make sense when talking about two small banks or mid-sized manufacturers. When it comes to hospitals and healthcare, it’s a different story.

Take Baptist Hospital. It was founded in 1960 on a vast tract of land covered with rockland pine scrub and palmettos at the corner of Galloway Road and Kendall Drive. There was little in the area. Dadeland Mall wouldn’t open as a small open-air shopping center for another two years.

From Baptist’s humble beginning, it has grown to a 728-bed hospital that serves about 32,000 in-patients and 72,000 emergency out-patients a year. The parent entity, Baptist Health South Florida has acquired hospitals as far north as Boynton Beach and as far south as Marathon in the Keys.

Its website shows that it operates 106 separate medical units and controls the practices of 245 physicians. It has almost 20,000 employees and over 3,000 doctors have privileges. That’s a lot of fingers in a lot of pies.

As a not-for-profit hospital, Baptist is not supposed to be profit-driven. But a look at its most recent audited income statement shows that it had what it terms “Excess of Revenues Over Expenses” of almost $250 million, giving it a bigger “profit” than industrial aluminum giant Alcoa. And that’s just in the past year.

One advantage that Baptist and other non-profits have over other entities is that it pays income taxes only on the money made by a handful of its for-profit subsidiaries. And it pays no ad valorem taxes. Its Kendall campus has an assessed total value of almost $385 million, yet it pays no property taxes, even on the portions of the office towers it rents out to unaffiliated entities. And it pays nothing in property taxes on its other hospitals, either.

Jackson Memorial, owned by the county’s Public Health Trust, doesn’t pay any taxes, either. Mount Sinai on Miami Beach is assessed by the Property Appraiser at $121 million, with $109 million of that exempt. Mercy Hospital, actually owned by HCA, is assessed and taxed at about $144 million of property value.

Healthcare is not price driven. Someone involved in a head-on collision on S. Dixie Highway won’t stop the ambulance until he can do a price comparison of the x-rays, MRIs, room rates, surgery, and pharmacy costs before telling the EMTs which hospital to go to.

The website MissionToCare.org maintains a database with average costs for 50 typical hospital treatments at 197 hospitals throughout the state of Florida. The birth of a child at Baptist averages $21,876. Baptist is able to negotiate a rate of insurance company reimbursement of about 48 percent or $10,575. The cost of childbirth at Jackson Memorial is $16,793, but Jackson only collects $6,432 from insurance companies. The Baptist mother has to come up with $11,301 while the Jackson Memorial mom is expected to pay less: $10,550. Mount Sinai charges about what Baptist does for the birth, but only manages to collect about what JMH gets from the insurance companies. In fact, the findings of several studies show that having a single dominant non-profit hospital in a market actually can raise patient costs between 26 to 40 percent.

How does Baptist do this? It’s in a stronger bargaining position when it comes to negotiating its reimbursement rates with insurers because is controls a much larger percentage of the market than any other non-governmental hospital. A 40- or 100-bed hospital can’t demand the same reimbursement rate that Baptist can.

If medical care were a normal business whose customers shopped on price, then a hospital with Baptist’s market clout might be expected to offer lower prices because of the volume of patients that it treats.

It doesn’t because it doesn’t have to.

Those who study the effect of hospital mergers have been looking for empirical evidence pointing in one direction or another, trying to answer the question of how consolidations affect patient prices. Researchers are finding that the goal of mergers, to generate cost savings and improve the quality of care, are falling short. The data points to the fact that almost all of the consolidations fail to achieve these goals.

Instead, hospital mergers will continue as a way to capture greater and greater market share, expand financing and cash flow options. In all too many cases, mergers are a way to enhance the personal egos of the organizations’ leaders than to enhance health outcomes or lower costs.

The healthcare industry, from doctors to hospitals to pharmacies and drug makers consume about one-fifth of our Gross Domestic Product, the measure economists use to weigh the amount of goods and services produced each year. That’s over $10,000 for every man, woman, and child in this country.

Among the 11 most industrialized countries, the U.S. ranks last for health outcomes, equity, and quality. All that spending has yielded poor health outcomes and a worsening life expectancy when compared with these other countries according to a 2018 report from The Commonwealth Fund.

That makes the advantages that non-profit hospitals all the more egregious. They can generate “profits” which are never taxed, avoid taxes in their properties, accumulate a war chest with which to buy out smaller competitors, and pay for it all by either keeping prices artificially high or even raising them.

So what’s the solution? Prohibiting hospital mergers? Encouraging them? Single payer health system? Going back to the old healthcare system with its gaping holes in the safety net?

What we need is a willingness to put politics aside, and maybe even profits, and to look at our health system with unjaundiced eyes, rather than being blind cheerleaders for local institutions. If the primary goal is to give value to shareholders or to increase market share, then our present system is adequate. But if instead we want our healthcare system to improve the health of everyone at a reasonable cost, to improve the quality of life, and to increase longevity, we need to start over.

Source: Community Newspapers

Top Trends Driving Demand For Healthcare Real Estate In South Florida

South Florida is on the verge of a major statewide demographic shift, with impacts that will ripple through the healthcare economy in many ways. Currently home to the highest concentration of older residents in the nation, more than 3.3 million Floridians are 65 and older, with 1 in 20 now 80 years old or older.

With continuing migration into Florida and increased longevity, nearly 1 in 4 Floridians will be 65 and older in 2030, according to The Florida Legislature Office of Demographic Research.

This growing population sector will certainly increase the local demand for medical care, but will there be enough medical real estate to keep up?

Real estate development and demographics go hand-in-hand. Our aging population will require more medical care.

Medical providers will need to prepare in advance for the demographic shift. Physicians must prepare for expansion. Diagnostic and treatment centers will need additional locations. Hospitals will need to expand outpatient services, on-and-off campus offices, and possibly acquire more medical practices.

Considering these needs, the current commercial real estate market presents formidable challenges to medical providers.

Construction costs are up and vacancy rates are down, making renovating and leasing existing space more difficult and cost-prohibitive. Regarding factors limiting construction of new medical office buildings, the apartment boom has driven land prices so high that office developers cannot compete to purchase sites.

Lenders have financed many new apartment projects but shied away from speculative office development. Medical office requires more parking than many other uses, thus requiring more land for development. Will these costs be passed on to the patients or will they lower profits for medical providers?

This looming demand for property to build patient treatment facilities likely will require creative solutions such as infill development, repurposing existing properties, and utilization of nontraditional properties for medical care.

For example, there are many “big box” retail sites (think Sears, K-Mart) that could easily be converted to medical uses. The parking is there, and the structures are sound, requiring only interior renovation.

Will investors continue to bring funds to medical office REITs and other medical properties? There is lingering uncertainty about the long-term impacts of the Affordable Care Act (ACA) and the Tax Cuts & Jobs Act (TCJA), including how many people will be insured, how leases will be treated for accounting purposes and other investment considerations associated with purchasing, leasing and owning.

Another big question is how new technologies, particularly telemedicine, will reshape South Florida’s healthcare delivery system. This may upend the traditional “bricks and mortar” medical office to a degree none of us can predict.

Despite various reasons for uncertainty, the coming increase in demand for medical services should keep investment in medical properties at a high level. In fact, in 2016, 2017, and 2018 to date we have seen very healthy investment and development in healthcare real estate.

On a national scale, according to data released by Revista and Healthcare Real Estate Insights (HREI), outpatient medical real estate development projects totaling nearly

$7.7 billion in construction value and 19.4 million square feet were completed in 2016, while another 17.3 million square feet of outpatient projects with a value of almost $6.5 billion were started.

Locally, in 2018, Cleveland Clinic Florida opened its new, three-story, 73,000-square-foot Coral Springs Family Health Center. Built for about $33 million and equipped for another $20 million, the ambulatory surgical center houses 17 medical specialties, imaging and diagnostic services.

As the aging population continues to shape the future of healthcare real estate in South Florida, healthcare real estate developers will face challenges related to finding land and existing buildings at a reasonable price. End users, including hospitals, physicians and diagnostic centers, will have difficulty finding affordable space to lease and contractors who can perform at an affordable level.

Navigating this real estate landscape demands market knowledge specifically as it pertains to healthcare providers. Expect to see emphasis on creative long-term options for renewal and expansion as a hedge against diminishing supply and rising costs.

Brokers, attorneys and appraisers who are experienced in the healthcare real estate sector will be focused on guiding all players through the markets and locating “deals.”

Source: Miami Herald

Memorial Healthcare Buys Pembroke Pines Petco To Expand Hospital

Memorial Healthcare Systems just bought a Petco store in Pembroke Pines for $6.5 million, just a few months after acquiring the Toys “R” Us next door.

Memorial Healthcare Systems, one of the largest public healthcare systems in the country, purchased the 15,775-square-foot building at 12251 Pines Boulevard for $412 per square foot, property records show.

C. Kennon Hetlage, executive vice president of west operations at Memorial Healthcare System said the Petco and Toy’s “R” Us buildings will be used as part of the expansion of Memorial Hospital West.

Hetlage said plans for the development of the site are currently underway and will include the relocation and expansion of the Memorial Cancer Institute. Construction is anticipated to begin in mid-to-late 2019, according to Hetlage.

The site includes a parking lot, and the combined property totals 94,857 square feet. The building was originally built in 1990 and renovated in 2004.

Alexandra Escudero of Fortune International Realty represented the seller in the deal.

Petco, a privately-held pet retailer with about 1,500 locations, purchased the building for $5.8 million in 2015, records show.

In August, Memorial Health Systems bought the 15,755-square-foot Toys “R” Us store. The Pembroke Pines store was one of about 800 Toys “R” Us stores across the country that closed after the company filed for Chapter 11 bankruptcy. Landlords are now struggling to find new tenants for those properties.

Source: The Real Deal

Outpatient Centers Continue To Top Healthcare List

In the last few years, more total joint and spine procedures, along with MRIs and CT scans have moved to outpatient settings, and moderate M&A activity within the outpatient surgery setting is impacting the industry, according to Becker’s Hospital Review. Outpatient migration has been a multi-decade trend and is a topic covered in almost every healthcare real estate conference or industry whitepaper. This theme remains as relevant as ever, as the shift toward outpatient off-campus settings continues unabated this year.

Two projects are soon to begin at Houston Methodist Hospital that illustrate this phenomenon. Demolition, renovation and expansion of Houston Methodist Research Institute’s imaging suite and a build-out of a new GMP cleanroom in the institution’s outpatient center are expected to be complete in spring 2019.

McCarthy Building Companies Inc. was recently awarded the two renovation and expansion projects. Within Houston Methodist Research Institute, McCarthy will undertake a complete demolition on the first-level 16,500-square-foot imaging suite, which will be reconfigured and expanded. The project will include significant mechanical, electrical and plumbing infrastructure upgrades, structural upgrades and finishes to accommodate new equipment.

When completed, the unit will house three pieces of imaging equipment including a Siemens 7 Tesla MRI, Siemens 3 Tesla MRI and a PET/CT. The 7T MRI scanner will be the first of its kind in Texas.

The size of the 7T MRI magnet–which weighs 45,000 pounds–and the opening space required to bring it into the facility poses several logistical and construction challenges for the McCarthy team. Positioning of the magnet will require removal of a portion of the existing building curtain wall facade, demolition of an interior stone/concrete masonry wall and 50 tons of magnetic shielding to be in placed in the suite’s floor, ceiling and walls. Furthermore, it will require re-routing of existing mechanical, electrical and plumbing infrastructure, all of which will happen while the facility is 100% occupied.

“In order to bring the MRIs into the building, McCarthy will have to remove a portion of the exterior glass,” Damian Lee, senior project manager for McCarthy Building Companies Houston division, tells GlobeSt.com. “Given the 7T is so large, teams will have to demo the stone wall in the existing building to create an opening large enough to fit through.”

McCarthy will also work on a 5,000-square-foot demolition and build-out of a new cleanroom on the third floor in the outpatient center. This project will include approximately 1,500 square feet of a pre-fabricated GMP cleanroom space and 3,500 square feet of support spaces including quarantine areas, storage spaces, offices and three mechanical rooms; and upgrades to the mechanical, electrical and plumbing infrastructure. Additionally, renovations on level two and four will be required to add a new air handling unit and exhaust fans to support the new cleanroom environment.

Specific challenges will include erecting 40-foot scaffolding in the atrium for underfloor plumbing, building three new mechanical rooms and running overhead MEP infrastructure on three occupied floors for new HVAC. The project will require heavy coordination with the cleanroom manufacturer, owners and trade partners to ensure lab equipment is positioned correctly. New HVAC and plumbing equipment will also be required for the project including seven new exhaust gas scrubbers, a new fluoride removal system, RO/DI system, new bio safety cabinets and new lab wet benches.

“McCarthy values and is proud to continue our successful partnership with Houston Methodist Hospital on such transformational and high-profile projects,” said Preston Hodges, McCarthy Houston division vice president. “We look forward to the lasting impact that these projects will have on the institution and the community it serves.”

Source: GlobeSt.

Baptist Health Pays $11M For Office Project Across From Hospital

A company affiliated with Baptist Health South Florida just paid $11.3 million for a medical office property directly across from the hospital.

Baptist Health Enterprises bought the 43,000-square-foot Plaza Galloway at 9055 Southwest 87th Avenue for $263 per square foot.

Plaza Galloway sold the five-building property, which is managed by Joanne Mitchell. Plaza Galloway initially bought the property for $2.5 million in 1999, records show.

Baptist Health South Florida is led by Brian Keeley and operates 10 hospitals, along with a network of more than 50 outpatient facilities. The non-profit hospital company has been aggressive in acquiring real estate in South Florida in recent years. Baptist Health did not immediately respond to a request for comment.

Paul Silverstein of RE/MAX Advance Realty’s Commercial Division represented the seller in the transaction.

The property sits on 2.93 acres and was built in 1973. The project is one of the last remaining redevelopment opportunities near the hospital complex, according to a press release.

Baptist Health is also under contract to pay $41.5 million for the development site of the Collection Residences in Coral Gables, court documents show.

Baptist Health has been expanding throughout South Florida in recent years. It recently opened a four-story, 60,000-square-foot outpatient facility at Crescent Heights’ mixed-use development at 709 Alton Road in Miami Beach.

Source: The Real Deal

Hospital Views On Medical Office Buildings

Hospitals often view their medical office building (MOB) investments differently than doctors that own their medical facilities. Doctors can build equity owning MOB’s during their career, with an expectation to cash out equity near retirement by either selling to a practice partner based on a market appraisal, or by structuring a Sale/Leaseback transaction with an investor to create a higher net present value of the MOB asset.

Hospitals typically have more complex issues to assess. Most have an investment portfolio consisting primarily of equities. Some hospitals consider MOB’s to be part of their investment portfolio. Other health care systems do not, and view their MOBs strictly from an accounting standpoint as an operating asset. A hospital system typically owns buildings they occupy with other owned MOBs rented to doctors and other health care providers.

Owner-Occupied MOBs

Hospital-occupied medical office buildings are good candidates for sale/leaseback transactions to monetize value in cases where the hospital has limited access to capital for property improvements, expansion or to free up cash to fund operations. However, it is not always necessary for health care providers to monetize owner/occupied MOB’s if they have strong credit with good access to capital at reasonable rates.

Tenant-Occupied MOBs

Hospital-owned, tenant occupied MOB’s have recently become a higher priority to sell for several reasons. MOBs are investments that tie up hospital capital that could more effectively be utilized on more strategic investments. Vacant MOB spaces provide zero-to-negative returns on this capital. Due to soft office market conditions across the US, many hospitals have increased vacancies with the opportunity cost of this capital tied up in their MOBs.

The estimated value of MOB holdings is added to the health care provider’s investment portfolio which hospitals use to analyze “MOB holdings percentage” of total investment. When the ratio of “MOB Holdings” as a percentage of total portfolio assets increases, portfolio risk also increases from an investment perspective due to the lack of geographic and industry diversification inherent in MOBs. This is especially true if patient volumes decrease as is the case currently in many markets. There are significant concerns today when effects of our uncertain economic conditions combine with uncertainty posed by health care reform. Special attention to safe diversification of the hospital’s overall investment portfolio is warranted.

Sale/leaseback of select hospital occupied buildings and/or straight sales of tenant occupied buildings can provide that asset diversification and improve the cash positions at a time when cash can be utilized to take advantage of more strategic opportunities.

An example of this strategy can be seen in the transaction where Carle Foundation Hospital sold its 92,000 sf MOB in Bloomington, IL for $24.25 million or $264 per square foot at an 8.5% cap rate, according to Robert Tonkinson, former CFO of the Carle Foundation based in Urbana, Illinois.

New Statutes: Stark Law

Two new statutes recently enacted by Congress will bring greater governmental scrutiny and action. Enforcement of these rules will cause headaches for hospitals and will likely motivate many to consider exiting commercial real estate or forming strategic partnerships with MOB real estate specialists. The “ 2009 Fraud Enforcement and Recovery Act” (FERA) and the “Patient Protection and Affordable Care Act” (PPACA) will have an impact on a hospital’s decision to self-disclose Stark Law violations related to hospital-physician leasing arrangements.

The impact of these rules on MOBs could be significant and cause many health care firms to sell their MOBs to third parties, if only to avoid the potential risks. Hospitals that wish to retain their MOB interests may consider outsourcing MOB management to commercial MOB specialists as an added layer of insulation from Stark Law liability. The most transparent and savvy way out of this newly heightened government scrutiny, however, may be to monetize MOB’s with sales or sale/master leasebacks. This avoids the inherent potential conflict posed by a doctor that refers patients to a hospital, and later asks the same hospital for six months free rent to sign a new lease. In this situation, the negotiation is driven by Federal Health Care Regulations with heavy fines awarded to hospitals that don’t live within these strict rules that are designed to protect patients by elimination of waste, fraud and unfairness within the federal healthcare reimbursement system. When a doctor asks a private investor MOB owner for six months free rent to sign that same new lease next to the hospital, it becomes a simple business decision driven by market forces, without the negative baggage of perceived conflicts of provider-owned MOBs.

MOB Values Up

The Deaconess Clinic of Evansville, Indiana sold five MOB’s totaling 260,500 sf for $45.26 million or $174 psf at an 8.25% cap rate in March 2010 using a 14-year term master lease back. According to Real Capital Analytics, the average annual sale price for MOB sales in major cities across the country of $5 million and up, has risensteadily from$140 psfin 2002 … to $218 psf at the top of the overheated market in 2006 … to $226 psf by the end of the second quarter of 2010.

This is not a misprint. We are actually getting higher prices today for large MOBs in major cities than we did at the peak of the real estate cycle just a few years ago. So what’s the catch? Unlike other segments of commercial real estate that have seen falling values, there is exceptional demand today supporting stronger-than-ever values for large MOB’s with strong-credit tenants on long term leases in major US markets.

But what about smaller MOB deals in smaller markets? I personally brokered the sale of 53 MOBs with an average sale price of $1,031,000 per transaction, located in tertiary markets in Florida, North Carolina, South Carolina, Georgia and Illinois from 2002 through the second quarter of 2010. I created the nearby bar charts to compare annual MOB big sales (i.e. $5+ million) in big markets (reported by Real Capital Analytics) to my smaller MOB sales (i.e. $1 million) in small markets over the past nine years. From 2002 through 2005, there was an average MOB price difference of only $20 psf between the big deals/big markets and the small deals/small markets.

Over that 2002-2005 period, cap rates for large transactions averaged only 0.6% lower than the small deal/small market prices. But the gap started to widen from 2006 thru 2008, when the big MOB deals averaged $30 psf higher and the cap rates for big deals compressed to average 1.5% lower than the cap rates for the small deals.

There was a striking difference from 2009 through Q2-2010 as big deals in big markets pulled away and averaged $80 psf higher than the small deals in small markets, with the cap rate differential moderating to only 1.1 percent. This condition over the last two years reveals an interesting trend. The more sophisticated investors (like hospital systems) that own big MOB’s in big cities realized that in addition to the other good reasons to sell mentioned previously, the top of market to sell for highest price is actually now, so they are selling.

Doctors predominately own smaller MOBs in smaller markets and are somewhat isolated from the realities of the current favorable market condition for MOBs. They have tended to remain on the sidelines during these last two years believing their MOB values are down like the rest of the real estate market, when in fact the opposite is true.

The majority of small MOB sales over the last two years were mostly distressed, vacant properties that sold at very low prices, creating the disparity of $80 psf between large ($5+ million) and small ($1 million) recorded MOB transactions. This should change, however, in 2011as the gap between large and small MOB deals narrows when doctors in smaller markets realize MOBs have escaped the declines of other segments and that now is one of the best times ever to sell medical office space at strong valuations.

Source: South Florida Hospital News

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